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Federal Reserve swipe-fee challenge meets skepticism at Appeals Court

By Andrew ZajacBloomberg News

Posted:
01/19/2014 12:01:00 AM MST

WASHINGTON — The Federal Reserve, caught in a multibillion-dollar fight between banks and retailers over debit-card transaction costs, drew support from a federal appeals panel for its decision to cap swipe fees at 21 cents, a ceiling that could cost financial firms $8 billion a year.

The three-judge panel, hearing the Fed's appeal Friday of a ruling that threw out the cap, was skeptical of arguments by retailers that the Fed hadn't followed the Dodd-Frank financial reform law in setting the debit-card swipe fee. The retailers, who successfully sued the Fed in a trial court, contend the fee should be lower, and that the central bank considered too many card-provider costs in setting the cap.

"We're trying to tell you, none of us buy that," U.S. Circuit Judge Harry Edwards of the U.S. Circuit Court of Appeals in Washington told a lawyer for the merchants.

Circuit Judge David Tatel said that Congress intended to give the central bank room to consider costs other than those explicitly set out in the Dodd-Frank law.

"We think there are non-incremental costs that are transaction-specific that can be included," Tatel said.

The Fed's appeal is the latest step in a more than four-year battle over a $16 billion revenue stream for banks that has pitted retailers of all sizes, including Home Depot, Walmart and Target, against banks led by JPMorgan Chase and Bank of America. Banks stand to lose about $8 billion a year if the cap stays at the current level, according to a Bloomberg Government report.

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About 50 billion debit transactions took place in 2011, and the cards have eclipsed checks and credit cards as the most common form of non-cash payment, according to court documents.

The fees under the Fed's cap are set by Visa and MasterCard, which own the payment networks and pass the money from merchants to banks.

The judges' comments bolstered the Fed's contention that it was correct in allowing the expenses such as computers, software and labor to be considered in setting a fee cap. They also indicate a decision in the case could turn on whether the panel thinks the collection of costs considered by the Fed was reasonable.

Retailers who sued the Fed say they're still being gouged. While the central bank cut the average swipe fee from 44 cents, the merchants have said it would be lower still under their reading of Dodd-Frank.

The merchant's view is in line with a decision by U.S. District Judge Richard Leon in Washington, who in July threw out the swipe-fee cap.

The Fed "clearly disregarded Congress's statutory intent by inappropriately inflating all debit-card transactions by billions of dollars," Leon ruled. The central bank factored into the cap costs it wasn't allowed to consider under the law, he ruled. The Fed also failed to boost competition in card transaction processing networks, Leon said.

The Fed, in a filing that urged the appeals court to defer to its judgment about which costs to consider in setting the cap, said Congress gave it "broad discretion" to act "as an arbiter in determining reasonable and proportional fees."

The central bank properly included costs that Congress hadn't addressed, such as equipment, hardware, software and labor involved in transaction processing, according to the filing.

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